Reverse mortgages gain favor, but aren't for everyone

Reverse mortgages, once a safety valve for struggling retirees, are now being pitched as a cash-in prospect for seniors of all income levels.

A reverse mortgage looks like a home-equity loan, except that the homeowner does not actually give up any equity. Instead, a homeowner puts a residence up as collateral for a loan, tied to the value of the home, that can be paid out as a lump sum or in monthly installments. The loan does not have to be paid back until the homeowner moves, or dies.

Reverse mortgages have been around for more than 40 years, but it wasn't until the past few years that their popularity took off. The reason: the recent surge in housing prices.

For someone living on suddenly hot property, cashing in without giving up home equity might be tempting. Especially with the loan proceeds being tax-free.

For physicians -- many of whom have less time to save for retirement than other professionals -- reverse mortgages can be a safety net to provide cash if other investments haven't met expectations or have been drained, said Carlo Panaccione, a financial planner in Redwood City, Calif., who works with physicians.

"It could be the sedative to let them know that if they bought that big house, there may be a way to use it in retirement, if they need it," he said.

On the other hand, reverse mortgages are not always easy money. The loans themselves have much higher fees than a home-equity loan -- a typical reverse mortgage might have fees at 6.8% of the loan. For homeowners who plan to sell their places in a short amount of time, taking on such costs might not make sense.

"Unless they are anticipating being in the home for a minimum of say two to three years, they may want to consider some alternatives," said Terry Bivins, president of the Illinois Mortgage Brokers Assn. and an executive with a reverse mortgage lender.

Depending on your age, though, loans generally are written for no more than one-half to two-thirds the value of your house, and taking out such a loan puts you at risk of being stuck with your house if the real-estate market come crashing down. If your house appreciates, then you conceivably could move and still pay off the loan.

But you have to remember that "move" doesn't just mean buying another house or condominium -- it also could mean moving into an assisted-living facility, or your child's home, or anywhere you might need extra, potentially costly care.

And you'll have to account for the reverse mortgage in your estate planning, given the provision that you can wait until you die to settle the loan. Of course, you won't pay back the loan, your heirs will. "Naturally, heirs may object to a reverse mortgage for that reason," notes the state of Texas' Office of Consumer Credit Commissioner on its Web site dealing with reverse mortgages.

History in reverse

Reverse mortgages have been available in the United States since 1961. The Dept. of Housing and Urban Development in the late 1980s created the Home Equity Conversion Mortgage (HECM) program, which most lenders participate in. Fannie Mae also offers reverse mortgages, and some proprietary products designed for higher-value homes are available.

Lately, the interest in reverse mortgages has accelerated. The National Reverse Mortgage Lenders Assn. reports 37,829 HECM loans were filed during the federal fiscal year 2004, up about 109% from 18,079 in fiscal year 2003.

More than 70,000 HECM loans are expected for fiscal year 2005, Bivens said. Even with that growth, only 1% of the potential reverse-mortgage market has been reached, according to a paper written by two University of California-Berkeley business professors.

To get an HECM-backed reverse mortgage, you have to be 62 years old, own your residence outright or have a mortgage balance that can be paid off at the time of the loan, and live in the residence that's the basis of the loan.

Al Caicedo, a certified senior adviser based in Clinton Township, Mich., said he had a client who used the extra cash from his reverse mortgage to pay off the traditional mortgage he had on his home. That freed up his monthly cash flow to pay for living expenses and medications.

Bivins, who is senior vice president of First Reverse Mortgage Store/GSF Mortgage Corp. in Oak Brook, Ill., said he had seen reverse mortgages used by everyone from the most wealthy to the cash-strapped for all kinds of purposes.

"You have people that are looking to supplement their income a little bit," Bivins said. "Some people are getting rid of their existing mortgages. They're doing estate planning. They're giving money to their kids while they're still living," he said.

Still, Panaccione said dipping into that money should be a last resort and shouldn't be counted on as a major part of retirement planning.

"It's there as a tool, like anything, so it shouldn't be crossed out," he said. "But it's like Social Security for someone under 50: I don't count on it in planning."